When James Gorman took over the running of Morgan Stanley’s broking business he told then chief executive John Mack he needed 30 days to review the business. Two years on and Gorman is now looking at the operations as a whole, having taken over the running of the US bank on January 1.

James Gorman, Morgan Stanley

Gorman is regarded as unflappable and in New York Times journalist Andrew Ross Sorkin’s recent book on the financial crisis, Too Big To Fail, he is frequently portrayed as a calming influence during Morgan Stanley’s near-death experience in 2008.
Fifteen months on from the financial crisis that forced Morgan Stanley to convert itself into a bank holding company and accept $9bn in funding from Japan’s MUFG, Gorman has inherited a set of challenges somewhat different from his predecessor that will test his managerial skills.

Andy Saperstein, head of wealth management for joint venture Morgan Stanley Smith Barney in the US, worked with Gorman when he was at consultancy firm McKinsey and at Merrill Lynch. He said: “James’s leadership style is to be extremely decisive but also very patient. One of his strengths as a president or chief executive is that, once he has made a decision, he allows the organisation to execute on that plan. Our business is like an ocean liner rather than a speedboat and you cannot keep turning the wheel.”

Financial News looks at what are likely to be some of the main areas for concern for Gorman as he begins the job of setting Morgan Stanley’s new course.

• Senior management

Am I one of Gorman’s guys? That is the question some senior Morgan Stanley bankers will be asking themselves. When Gorman took over the bank’s broking business he got rid of most of the division’s top managers and the signs are that despite making several senior changes more could be on the way.

Last Monday, managing directors at the bank were told that co-head of global capital markets John Hyman had resigned for “personal reasons”. Hyman’s desire to leave had been known for some time, however one London-based source said Gorman’s ascension to the chief executive’s suite had played a part in his decision.

The source said: “There’s definitely going to be a lot of movement here. Already quite a few senior people have been sidelined, and Gorman’s guys are going to be the winners from this.”

• Fixed-income business

Returning the fixed-income division to the global top table will be one of the hardest tasks facing Gorman and his management team. Historically Morgan Stanley was one of the biggest players in the market and in the first quarter of 2007 its US trading business alone made $3.4bn, $800m more than JP Morgan, putting it just behind Citigroup. In the third quarter of 2009 the US business made $2.5bn, less than half the revenues of JP Morgan, $2bn behind Citigroup and nearly $4bn less than Goldman Sachs, according to a Credit Suisse report published last week.

In a presentation in November at the Bank of America Merrill Lynch financial services conference, then chief financial officer Colm Kelleher said increasing trading revenues was one of the bank’s top priorities.

• Smith Barney integration

After the announcement of the formation of a broking joint venture with Citigroup-owned broker Smith Barney 12 months ago, Morgan Stanley faced a wave of financial adviser departures and client defections. This exodus has halted since the deal closed ahead of schedule in June last year, compared with the original target of the third quarter. Saperstein said: “Among senior management we have not lost anybody that we wanted to keep.”

The job now is to make the joint venture work and increase revenues and margins, which were below 10% at the end of the third quarter, according to the bank’s results.

Saperstein said over the next 24 to 36 months the joint venture’s priorities were to move to a new single technology platform that is being developed, increase margins to more than 20% and work on merging the cultures of the two firms.

Saperstein said: “If you compare apples to apples Morgan Stanley and Smith Barney were both at the high end from a margin perspective and with expected synergies there is no reason to believe we cannot be at the top.”

• Asset management

In a report on Morgan Stanley published last week, UBS analysts said the bank’s asset management division needed to be “re-tooled”. The sale of the bank’s Van Kampen Investments retail asset management business, which will net about $1bn, has been seen by the market as part of the turnaround of the business, and analysts at Credit Suisse expect the firm to report a slight increase in assets under management for the fourth quarter.

• Hiring

In late 2008 Morgan Stanley undertook one of the most aggressive staff reduction programmes of any big bank. This decision was in part responsible for the bank’s failure to capitalise on the resurgence in credit markets last year to the same extent as rivals. Recognising this, the firm is halfway through a rehiring programme to rebuild businesses such as fixed income, emerging markets, foreign exchange and equity derivatives. So far, about 200 hires have been made.

Gorman will hope the additions start making an impact on earnings in the second half of this year.

Cream of the crop: the hand-picked senior management team

Morgan Stanley’s new chief executive talked with more than 500 people over a two-month period before naming four of his five senior management team last month. Financial News profiles his pick of the bunch.

Last December, Gorman announced the high-profile hire of his former colleague Greg Fleming, previously president and chief operating officer at Merrill Lynch. Fleming left Merrill soon after the merger with Bank of America in January last year to join Yale Law School as a senior research scholar and lecturer. Although he has no direct fund management experience, he helped engineer some of the biggest M&A deals in the sector, including the sale of Merrill Lynch’s investment management arm to BlackRock. Fleming joined Merrill as an investment banker in 1992 and in 2003 became co-president of global markets and investment banking. In 2007, he was named as the bank’s president and chief operating officer.

Colm Kelleher
Co-president of institutional securities

Kelleher, who holds both UK and Irish passports, is well known for being frank. According to Andrew Ross Sorkin’s book Too Big to Fail, when Morgan Stanley considered buying Wachovia in 2008, Kelleher remarked: “That’s a **** sandwich even I can’t get my big mouth around.” Kelleher became chief financial officer of Morgan Stanley in October 2007, when he also took on the role of co-head of strategic planning with Gorman. He joined Morgan Stanley in 1989 and his former roles include co-heading fixed income in Europe – leading the client coverage group – and helping establish the European financial institutions business. In his new role, he will lead Morgan Stanley’s sales and trading operations.

Johnson has 30 years’ experience in wealth management, having started his career in 1978 as a financial consultant with Merrill Lynch in Chicago. Prior to becoming president of Morgan Stanley Smith Barney, he was president of Citigroup’s global wealth management business in the US and Canada. In a talk to students at the Tepper School of Business in 2008, Johnson said he arrived at work before 6am and typically put in 10 to 14-hour days. He said: “The secret to leadership is: give the troops what they want.”

Gorman appointed Porat to his team for her expertise in advising financial institutions from her time as global head of the financial institutions group since 2006. In 2008 Porat, alongside veteran Morgan Stanley investment banker Robert Scully, led the team advising the US Treasury on its takeover of mortgage companies Fannie Mae and Freddie Mac and advised the Federal Reserve on the potential failure of insurer American International Group. Porat began her career with Morgan Stanley in 1987.

Taubman was among the top 10 most prolific M&A bankers last year, according to data provider mergermarket, and last month he was part of the Morgan Stanley team that advised cable company Comcast on its $22.9bn (€16bn) deal with conglomerate General Electric. He joined Morgan Stanley in 1982 and in 2003 became global head of M&A. In 2007, he was named global head of investment banking. In his new role he will continue to oversee global investment banking.